States boost borrowings in March amid lower SDL yields and rate cut expectations

States have increased their borrowings in the last month of the financial year, as raising funds is comparatively cheaper with low yields, due to the absence of central government security auctions in March, treasury experts said.

“The absence of G-Sec supply has facilitated strong absorption of SDL issuances by institutional investors. They are also positioning ahead of the April policy, anticipating rate cuts in April and/or June to drive mark-to-market gains in the next fiscal year,” said Venkatakrishnan Srinivasan, founder of Rockfort Fincap, a debt advisory firm.

As many as 21 states jointly raised Rs 72,255 crores on Tuesday, as against Rs 56,621 crores notified earlier. The average cut off on 10-year State Development Loans (SDL) security was 7.05%.


In the previous three SDL auctions held in March, the amount raised by state governments was revised upward by about Rs 10,000 crores. The yields on SDL have fallen steadily since the beginning of this month, with bonds sold in the range of 7.34% - 7.21%.

The 10-year yields of the benchmark government security were traded at 6.64% on Tuesday, down from 6.72% at the beginning of March, CCIL data showed.

Softer SDL yields are due to the absence of central government security auctions and expectations of a rate cut in the upcoming monetary policy on April 9, experts said.

Experts believe liquidity infusion by the Reserve Bank of India (RBI) has also provided banks with enough funds, enabling them to invest in SDLs. The RBI has been conducting operations to infuse durable liquidity via open market operations and foreign exchange swaps.

“There has been a lot of liquidity provided by the RBI, so unless we don't have other government security auctions, these SDL auctions will see an increase in demand,” said Madan Sabnavis, chief economist at Bank of Baroda.

The daily average liquidity deficit in the banking system is Rs 1.62 lakh crore in March.